Is The Fed Finally Winning Its War On Inflation?

Look beyond the headlines to discover the driving forces behind market trends and consider how they impact a credit union’s investment portfolio.

Top-Level Takeaways

    • The bond market got off to a great start in January, boosted by lower rates, tighter spreads, and reduced rate volatility.
    • Financial markets continue to fight Fed guidance by pricing for rate cuts in the second half of the year; Fed Chair Powell’s Feb. 1 press conference didn’t do enough to push back on these expectations.
    • Inflation risk was the predominant economic theme of 2022, but a debt ceiling standoff threatens to take the top spot in 2023.

It was a nice start to the year for a bond market still reeling from a tough 2022. Last year was marked by sharply higher interest rates, wider spreads, and persistently high-rate volatility, all of which negatively impacted liquidity conditions and overall performance. In January, all these risk factors reversed course on speculation the Fed has effectively won the war on inflation, allowing investors to take advantage of attractive bond yields.

The Fed has so far refused to acknowledge any such victory on the inflation front, particularly while labor markets remain historically tight and wage growth well above average. Although we are likely closer to the terminal Fed funds rate based on recent economic data trends, there is still a question of how long the Fed holds the benchmark rate at its terminal level.

This is where the bond market is currently at odds with Fed guidance. In the updated Summary of Economic Projections (SEP) released at the Dec. 14, 2022, FOMC meeting, all but two of the 19 participants forecasted a Fed funds rate of 5.125% or higher at the end of this year, and Fed funds futures and overnight index swaps (OIS) continue to price for rate cuts in the second half of the year.

As expected, the Fed announced a 25-basis-point rate hike during the Feb. 1 FOMC meeting, and the official statement said the Fed anticipates “ongoing increases in the target range will be appropriate.”

The plurality of increases suggests a Fed funds target rate reaching at least 5.25% as the Fed sees things today. However, chair Jerome Powell failed to firmly push back on current market pricing of rate cuts in the second half of the year, which sparked a 10-to-12-basis-point decline in intermediate Treasury yields.

Whether by intent or not, Powell’s reluctance — or inability — to hammer home a hawkish tone was a bit surprising given it was announced on the same day that job openings — one of Powell and his colleagues’ main areas of concern in the past year — unexpectedly rose by nearly 600,000 in January to 11.012 million, the highest since last July.

This market commentary is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions. Visit to read about the latest economic data and overall market trends. 

Jason Haley, Chief Investment Officer, ALM First 

Jason Haley is ALM First’s chief investment officer, joining the firm in 2008. He heads ALM First’s Investment Management Group (IMG) and is portfolio manager for the Trust for Credit Unions mutual funds. Haley and his team are responsible for leading the investment process and investment theme development for the firm. Haley also oversees all capital markets activities, including portfolio management, trading, market research and commentary, and execution of hedging and funding strategies for the firm’s depository clients. He holds an MBA with a concentration in finance and a BBA with a concentration in marketing, both from The University of Mississippi.


February 21, 2023

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